Law Web: Whether bonafide tenant has right to approach DRT under securitisation Act?

Bearing in mind

the decision in Harshad Govardhan Sondagar (supra), in a case where the

aggrieved person claims to be or is a bona fide lessee or a tenant from whom

possession is yet to be taken over but a sale notice has been issued involving the

leasehold or tenanted property, different considerations would apply and even

without losing possession or handing over of possession of the portion of the

secured asset under lease or tenancy to the secured creditor, the lessee or the

tenant, as the case may be, being a non-borrower would have the right to

approach the tribunal no sooner the sale notice is issued in terms of the provisions

of Rule 8(6) of the Rules, and notwithstanding the decisions in V. Noble Kumar

(supra) and Mercury (supra). This, I hold, because V. Noble Kumar (supra) did not

have the occasion to deal with a grievance espoused by a person who claimed

himself to be a bona fide lessee or tenant and any observation made therein may

not apply to a non-borrower. If this right of the non-borrower is not recognized, he

shall be without a remedy.

Consequently, I hold that the relevant tribunal having jurisdiction under Section 17

of the Act on being approached has a duty to consider the status of the party

approaching it to arrive at a considered opinion as to whether the application should be entertained or not.

Kolkata High Court (Appellete Side)

S. Vision Comptech Integrators ... vs State Bank Of India on 20 June, 2014

Author: Dipankar Datta

Citation; AIR 2014 Calcutta 161

1. The case pleaded in this writ petition dated June 3, 2014 is this. The property at

14, Elias Road, Agarpara, Khardah, 24 Parganas (North) (hereafter the said

property) was mortgaged by the third respondent as security for obtaining loans

from the first respondent (hereafter the bank) for the fourth respondent. Failure of

the third and the fourth respondents to repay the dues of the bank having

occasioned, it has proceeded against them in terms of the provisions of the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 (hereafter the Act). A notice dated May 9, 2014 inviting offers

from interested purchasers has been issued by the bank in terms of Rule 8 of the

Security Interest (Enforcement) Rules (hereafter the Rules), whereby the said property has been put for sale on "as is where is" basis and such sale is fixed on

June 23, 2014. The petitioner is a bona fide tenant under the third respondent,

having been inducted in a portion of the said property in 2003 prior to creation of

the mortgage in 2007. A suit instituted by the petitioner against the third

respondent for declaration and permanent injunction is pending in the district

court at Barasat, in connection whereof an interim order of injunction restraining

the third respondent from evicting the petitioner is subsisting. Although the

petitioner is in possession of the portion of the said property under tenancy and

has a right to challenge the sale notice under Section 17 of the Act (since the

encumbrance created by the tenancy is neither acknowledged in such notice nor

does not make it clear that the said property is being sold subject to such

tenancy), but it is unable to do so having regard to an order dated May 27, 2014

passed by the Kolkata Debts Recovery Tribunal No. II. While hearing S.A. No. 627

of 2014 (Sri Sanjoy Dutta v. UCO Bank), being an application filed under the

Section 17 of the Act, it has been held therein that even though sale notice in

respect of a secured asset might have been issued, an application thereunder

would not be maintainable so long the secured creditor does not take physical

possession of the secured asset. While holding so, the tribunal considered the

judgment and order dated May 6, 2014 passed by me on W.P. No. 353 of 2014

(M/s. Mercury Exporters and Manufacturing Pvt. Ltd. & anr. v. Punjab National

Bank and anr.), which has since been affirmed by an Hon'ble Division Bench by its

judgment and order dated May 20, 2014 passed in APO No. 177 of 2014 (M/s.

Mercury Exporters and Manufacturing Pvt. Ltd. & anr. v. Punjab National Bank and anr.). Approaching the tribunal having jurisdiction with a Section 17

application, in the circumstances, would be an idle formality.

2. Apprehending that the tribunal would decline to entertain its application under

Section 17 of the Act, the petitioner has presented this writ petition seeking, inter

alia, the following relief:

"Your petitioners most humbly pray Your Lordships for -

(a) A writ of and/or in the nature of Certiorari do issue commanding the respondents their men, agents, servants and subordinates to transmit and certify the records of the instant case including the impugned Sale Advertisement dated 9.5.2014 being Annexure P-1 herein published by the respondent Nos. 1 and 2 in Times of India and in Bartaman for sale of the property situated at 14, Elias Road, Agarpara, Khardah, 24 Parganas, West Bengal in the name of Agarpara Company Limited, the respondent No. 3 herein so that on perusal of the same conscionable justice may be done by quashing or setting aside the said impugned sale advertisement;

(b) A writ of or in the nature of Mandamus commanding the respondents and their men, agents, servants and subordinates not to give any effect or further effect to the impugned Sale Advertisement dated 9.5.2014 being Annexure P-1 herein published by the respondent Nos. 1 and 2 in Times of India and in Bartaman for sale of the property situated at 14, Elias Road, Agarpara, Khardah, 24 Parganas, West Bengal in the name of Agarpara Company Limited, the respondent No. 3 herein;"

3. According to Mr. Mitra, learned senior advocate for the petitioner, I had taken the

view in Mercury (supra) [relying upon the decision of the Supreme Court in

Standard Chartered Bank v. V. Noble Kumar, (2013) 9 SCC 620], that the

petitioner therein would be entitled to present an application under Section 17 of

the Act before the relevant tribunal only after possession of the secured asset is

handed over to the secured creditor. The writ appeal thereagainst has been

dismissed upholding the said view, as a consequence whereof the tribunal has

not been entertaining applications under Section 17 of the Act concerning cases where physical possession of the secured asset is still with the borrowers. An

apprehension is expressed by him that if the petitioner waits for possession of

the portion of the said property under its tenancy to be lost and thereafter

approaches the tribunal for restoration of possession, the tribunal would have no

authority to direct restoration of possession in view of the clear language of sub-

section (3) of Section 17 of the Act restricting relief that could be granted only to

a borrower. An unreported decision of the Supreme Court of recent origin in

Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. &

ors (Criminal Appeal No. 736 of 2014) has been cited for drawing support, where

it has been observed as follows:

"24. When we read sub-section (1) of Section 17 of the SARFAESI Act, we find that under the said sub-section 'any person (including borrower)', aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor or his authorised officer under the Chapter, may apply to the Debts Recovery Tribunal having jurisdiction in the matter within 45 days from the date on which such measures had been taken. We agree with the Mr. Vikas Singh that the words 'any person' are wide enough to include a lessee also. It is also possible to take a view that within 45 days from the date on which a possession notice is delivered or affixed or published under sub-rules (1) and (2) of Rule 8 of the Security Interest (Enforcement) Rules, 2002, a lessee may file an application before the Debts Recovery Tribunal having jurisdiction in the matter for restoration of possession in case he is dispossessed of the secured asset. But when we read sub-section (3) of Section 17 of the SARFAESI Act, we find that the Debts Recovery Tribunal has powers to restore possession of the secured asset to the borrower only and not to any person such as a lessee. Hence, even if the Debt Recovery Tribunal comes to the conclusion that any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor are not in accordance with the provisions of the Act, it cannot restore possession of the secured asset to the lessee. Where, therefore, the Debts Recovery Tribunal considers the application of the lessee and comes to the conclusion that the lease in favour of the lessee was made prior to the creation of mortgage or the lease though made after the creation of mortgage is in accordance with the requirements of Section 65A of the Transfer of Property Act and the lease was valid and binding on the mortgagee and the lease is yet to be determined, the Debts Recovery tribunal will not have the power to restore possession of the secured asset to the lessee. In our considered opinion, therefore, there is no remedy available under Section 17 of the SARFAESI Act to the lessee to protect his lawful possession under a valid lease."

(emphasis on the words in bold font is that of Mr. Mitra)

4. The principal contention, thus, urged by Mr. Mitra is that a bona fide tenant or a

lessee cannot reclaim possession by taking recourse to Section 17 of the Act after

having lost it in course of measures taken by the secured creditor against a

borrower acting in terms of Section 13 of the Act, since the remedy in terms of

sub-section (3) of Section 17 is available only to a borrower and not to a non-

borrower like the petitioner. Considering the fact that the Act does not provide

any remedy to a bona fide tenant or non-borrower like the petitioner, it cannot be

left without a remedy and taking recourse to the writ court is the only option left

to it.

5. Mr. Mitra, in his usual politeness, submitted that the ratio of the decision in V.

Noble Kumar (supra) may require reconsideration and appealed that the writ

petition be entertained and the contentious issues decided.

6. Mr. Sanyal, learned advocate for the bank and its authorised officer (the second

respondent) contended that the petitioner is not a bona fide tenant of the third

respondent and, therefore, the Court may not entertain the writ petition.

7. When it was observed by me that the factual dispute would not be examined and

that I propose to relegate the petitioner to the tribunal, he reserved his

arguments to support the action taken by the bank before the tribunal, if at all it is approached by the petitioner at a later stage, and submitted that the bank may

be permitted to raise all points then.

8. None has appeared for the third and the fourth respondents despite service and

hence their version has not been available.

9. Having heard the appearing parties, I am of the considered opinion that a suitable

clarification may clear the position paving the way for the petitioner to seek its

remedy by approaching the relevant tribunal with an application under Section

17(1) of the Act so that it has the opportunity to decide the factual as well as the

legal issues that might be raised. By this judgment, only the point as to whether

a non-borrower, from whom physical possession is yet to be taken but a sale

notice has been issued by the secured creditor in respect of a property occupied

by it, could present an application under Section 17 of the Act is proposed to be

decided.

10. Till the decision in V. Noble Kumar (supra) was rendered, I read and understood

the provisions of the Act as not requiring any notice in Appendix IV to be issued

by the secured creditor to a borrower before possession, either physical or

symbolic, is taken over but conferring a right on such borrower or any aggrieved

person to approach the tribunal under Section 17 of the Act immediately after

possession of the secured asset, either physical or symbolic, were taken by the

secured creditor and notice to this effect in Appendix IV issued in terms of Rule

8(1) of the Rules; or to apply under Section 17 of the Act in a case where either

physical or symbolic possession has not been taken, yet, a sale notice is issued

in respect of the secured asset inviting offers from interested purchasers. This understanding was based on the contents of Section 13(4) of the Act and Rule

8(1) of the Rules read with Appendix IV appended thereto, more specifically the

second paragraph of Appendix IV requiring the authorised officer to say that "the

undersigned has taken possession of the property described hereinbelow ...." and

the requirement of sub-rule (2) of Rule 8 in regard to publication of notices in

newspapers, which in effect is a warning to the public not to deal with such

property, of which possession has been taken. That symbolic possession of a

secured asset could be taken by a secured creditor instead of actual possession

appears on a reading of sub-rule (3) of Rule 8 and, therefore, there could be no

reason to deny an aggrieved person the right to approach the tribunal once

symbolic possession of the secured asset is taken.

11. However, such understanding has taken a toss with the enunciation of law in the

decision in V. Noble Kumar (supra). While considering when an

application/appeal under Section 17 could be presented, it has clearly been laid

down therein that a borrower is entitled to prefer an appeal under Section 17 of

the Act after the possession of the secured asset is handed over to the secured

creditor (paragraph 27), and appeal under Section 17 is available to the borrower

only after losing possession of the property (paragraph 28). The decision also

lays down the law that after possession is handed over to the secured creditor,

the subsequent specified provisions of Rule 8 concerning the preservation,

valuation and sale of the secured assets, as well as the rules following the same,

would apply (paragraph 36.4).

12. It would be proper at this stage to quote hereunder the relevant paragraphs from

the said decision:

"27. The 'appeal' under Section 17 is available to the borrower against any measure taken under Section 13(4). Taking possession of the secured asset is only one of the measures that can be taken by the secured creditor. Depending upon the nature of the secured asset and the terms and conditions of the security agreement, measures other than taking the possession of the secured asset are possible under Section 13(4). Alienating the asset either by lease or sale, etc. and appointing a person to manage the secured asset are some of those possible measures. On the other hand, Section 14 authorises the Magistrate only to take possession of the property and forward the asset along with the connected documents to the borrower (sic the secured creditor). Therefore, the borrower is always entitled to prefer an 'appeal' under Section 17 after the possession of the secured asset is handed over to the secured creditor. Section 13(4)(a) declares that the secured creditor may take possession of the secured assets. It does not specify whether such a possession is to be obtained directly by the secured creditor or by resorting to the procedure under Section 14. We are of the opinion that by whatever manner the secured creditor obtains possession either through the process contemplated under Section 14 or without resorting to such a process obtaining of the possession of a secured asset is always a measure against which a remedy under Section 17 is available.

28. It can be noticed from the language of the proviso to Section 13(3-A) and the language of Section 17 that an 'appeal' under Section 17 is available to the borrower only after losing possession of the secured asset. The employment of the words 'aggrieved by ... taken by the secured creditor' (emphasis supplied) in Section 17(1) clearly indicates the appeal under Section 17 is available to the borrower only after losing possession of the property. To set at naught any doubt regarding the interpretation of Section 17, the proviso to sub-section (3-A) of Section 13 makes it explicitly clear that either the reasons indicated for rejection of the objections of the borrower or the likely action of the secured creditor shall not confer any right under Section 17.

36. Thus, there will be three methods for the secured creditor to take possession of the secured assets.

36.1. (i) The first method would be where the secured creditor gives the requisite notice under Rule 8(1) and where he does not meet with any resistance. In that case, the authorised officer will proceed to take steps as stipulated under Rule 8(2) onwards to take possession and thereafter for sale of the secured assets to realise the amounts that are claimed by the secured creditor.

36.2. (ii) The second situation will arise where the secured creditor meets with resistance from the borrower after the notice under Rule 8(1) is given. In that case he will take recourse to the mechanism provided under Section 14 of the Act viz. making application to the Magistrate. The Magistrate will scrutinise the application as provided in Section 14, and then if satisfied, appoint an officer subordinate to him as provided under Section 14(1-A) to take possession of the assets and documents. For that purpose the Magistrate may authorise the officer concerned to use such force as may be necessary. After the possession is taken the assets and documents will be forwarded to the secured creditor.

36.3. (iii) The third situation will be one where the secured creditor approaches the Magistrate concerned directly under Section 14 of the Act. The Magistrate will thereafter scrutinise the application as provided in Section 14, and then if satisfied, authorise a subordinate officer to take possession of the assets and documents and forward them to the secured creditor as under clause 36.2.(ii) above.

36.4. In any of the three situations above, after the possession is handed over to the secured creditor, the subsequent specified provisions of Rule 8 concerning the preservation, valuation and sale of the secured assets, and other subsequent rules from the Security Interest (Enforcement) Rules, 2002, shall apply."

(underlining by me for emphasis)

13. Mr. Mitra contended that the observations made in paragraph 27 of the decision

must be confined to cases where Section 14 of the Act is invoked by the secured

creditor, whereas the observations made in paragraph 28 could apply to cases

where symbolic possession is taken and not actual physical possession. According

to him, what the Supreme Court intended to mean by the words 'losing possession'

is that the secured creditor had taken action in terms of Section 13(4)(a) by issuing

a possession notice in Appendix IV and, therefore, even at that stage, an

application under Section 17 of the Act would be maintainable. He also contended

that the decision does not, in so many words, lay down the law that issuance of

the possession notice is a condition precedent for taking possession of the secured

asset.

14. I am afraid, the submissions of Mr. Mitra do not appeal to me in view of the

observations made in paragraph 36 and its several sub-paragraphs extracted

supra. Paragraph 36.1 says that the secured creditor has to take possession and

thereafter proceed for sale of the secured assets to realise the amounts claimed by

it. Paragraph 36.4 refers to "possession ... handed over to the secured creditor"

and not 'losing possession'. My reading of the decision in V. Noble Kumar (supra),

insofar as a borrower [as defined in Section 2(f) of the Act] is concerned, is that

'handing over of possession' and 'losing possession' carry the same meaning in the

sense that the same could be used inter-changeably as and when the secured

creditor gets physical possession of the secured asset and that it is only after

handing over of physical possession of the secured asset from the borrower to the

secured creditor that the borrower acquires the right to move the Tribunal.

Although not arising for a decision directly on this writ petition, the

tribunals/Courts in an appropriate case may have to consider whether a sale

notice in respect of a secured asset can at all be issued after valuing such asset,

without possession thereof being handed over to the secured creditor from the

borrower in view of the decision in V. Noble Kumar (supra). My understanding of

the Supreme Court's interpretation of the relevant law in that case is that steps for

preservation, valuation and sale of a secured asset must follow possession of the

secured asset. I have not been able to read paragraph 36.4 otherwise.

15. To protect a bona fide lessee or tenant from being drowned in a situation of no

remedy being available under the Act, the Supreme Court in Harshad Govardhan

Sondagar (supra) has even read the requirement of complying with natural justice in Section 14 of the Act before an order is made by the relevant magistrate. The

effect is that what was otherwise a non-adjudicatory process would now partake

the character of a quasi-judicial proceeding.

16. Be that as it may, here the sale notice has been issued. I need not examine at this

stage whether the sale notice could have been issued without possession of the

said property being handed over to the secured creditor. However, bearing in mind